Hong Kong Insurance Implementation Support Group (HKIISG)

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1 Hng Kng Insurance Implementatin Supprt Grup (HKIISG) TRG Feb 2018 meeting highlights 20 March 2018

AP01 Separatin f insurance cmpnents f a single insurance cntract

separatin f insurance cmpnents f a single cntract fr measurement

investment cmpnents and distinct gds and nn-insurance services.

cntract 17 and frms the lwest level f the unit f accunt in IFRS 17

generally be cnsidered the lwest IFRS 17 level f the unit f accunt

the underlying ecnmic substance Cmbining different multiple cverages

substance f the cntractual rights and bligatins is nt reflected

accunting plicy chice Cvera ge A Risk A Lwest level f the unit f

Cverage C Risk C Cverage D Risk D Nninsurance service cmpnents

3 AP01 Separatin f insurance cmpnents f a single insurance cntract (1/2) Key highlights Key questin: Whether IFRS 17 permits the separatin f insurance cmpnents f a single cntract fr measurement purpses IFRS 17 set ut the requirements n separating derivatives, investment cmpnents and distinct gds and nn-insurance services. IFRS 17 is then applied t all remaining cmpnents f the hst insurance cntract 17 and frms the lwest level f the unit f accunt in IFRS 17 Remaining cmpnents f hst insurance cntract after unbundling wuld generally be cnsidered the lwest IFRS 17 level f the unit f accunt There might be circumstances where ne legal cntract des nt reflect the underlying ecnmic substance Cmbining different multiple cverages int ne legal insurance cntract, is nt sufficient t cnclude that the substance f the cntractual rights and bligatins is nt reflected Separatin f insurance cmpnents within a legal cntract is nt an accunting plicy chice Cvera ge A Risk A Lwest level f the unit f accunt Remaining cmpnents f hst insurance cntract Cverage B Risk B Cverage C Risk C Cverage D Risk D Nninsurance service cmpnents Derivatives Investment cmpnents 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

4 AP01 Separatin f insurance cmpnents f a single insurance cntract (2/2) Key highlights cnt d The discussin highlighted a few examples f what staff wuld cnsider in assessing when substance wuld verride the frm f a cntract: Cash flws interdependencies Presence r nt f cash flws interdependencies between insurance cmpnents within a single cntract Hw are the cmpnents managed Different cmpnents being managed separately in a pl f items sharing similar risks, with multi-cverage cntracts managed tgether as such indicating ne cntract Standalne cntracts Different cmpnents being sld by entity separately as standalne cntracts, with cverages nly sld as part f a cmbined cntract indicating it is ne cntract Timing f lapses Different cmpnents can be lapsed separately, with cmpnents lapsing tgether in all cases indicating it is ne indivisible cntract 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

5 AP02 Bundary f cntracts with annual repricing mechanisms (1/2) Key highlights Certain insurance cntracts have annual repricing mechanisms allwing plicyhlder a guaranteed yearly renewal f the plicy at the price determined at a prtfli, rather than individual plicyhlder level. The cntract reflects the risk f the particular plicyhlder nly at issue date. Cntract Examples A. Step-rated insurance cntract B. Unit-linked investment cmpnent cmbined with an insurance cmpnent similar t the abve Cntract Features Guaranteed t be renewable annually with n further underwriting f the individual plicyhlder Premiums are determined fr each age using a step-rated premium table and hence increased each year based n the table The table is determined based n cash flw prjectins carried ut ver the ptential future lifetime f a cntract Annual repricing at a prtfli level is dne by replacing the table Insurance cmpnent with characteristics similar t Example A Annual repricing f the insurance fees at a prtfli level using steprated fee tables Unit-linked cmpnent is always priced based n the fair value f the underlying items Cntract can be repriced annually at a prtfli level by reassessing the step-rated tables Key questin: Whether insurance cntracts with annual repricing mechanisms wuld have a cntract bundary f ne year r lnger than ne year, in particular, in respnse t IFRS 17 para. 34(b) 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) 20 March

6 AP02 Bundary f cntracts with annual repricing mechanisms (2/2) Key highlights cnt d Cash flws resulting frm renewal terms f an insurance cntract with annual repricing mechanisms shuld nt be included within the cntract bundary, when new plicyhlders will receive the same price at that pint in time Separate Cntract Bundary Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Separate Renewal Perid with annual repricing mechanisms A number f TRG members nted that there is a substantial benefit given t the existing plicyhlders when they can renew cver at the annual table rates withut having t disclse the develpments f their persnal medical cnditins The smth prgressin f rates included in the premium table fr different ages the entity is cnsidering risks beynd ne year The staff nted plicyhlder risks shuld nly be cnsidered in para. 34(b) includes nly the insurance and financial risks that the plicyhlder can transfer t the insurer but excludes plicyhlder-behavir related risks i.e. lapses r expenses risk, which are created by the cntract 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

7 AP03 Bundary f reinsurance cntracts held (1/2) Backgrund IFRS 17 Para 33 states that all future cash flws within the bundary f each cntract in a grup f insurance cntracts shall be included in the measurement f that grup while para 34 sets ut the bundary when cntractual and substantive bligatins end The paper is n the practical applicatin f the criteria in paragraph 34 t reinsurance cntracts held, fcusing n three reinsurance specific factrs: The ability f reinsurer t exercise rights and have bligatins similar t thse described by paragraph 34 f IFRS 17; The reinsurer s right t terminate cverage; and The rights and bligatins f the hlder f the reinsurance cntract (smetimes called the cedant). The cash flws within the bundary f the reinsurance cntract held arise frm the substantive rights and bligatins f the cedant The cedant s substantive right is t receive services frm the reinsurer, while the substantive bligatin is t pay amunts t the reinsurer Key questin: Hw t interpret IFRS 17 para. 34 regarding bundary f an insurance cntract with respect t reinsurance cntracts held 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

8 AP03 Bundary f reinsurance cntracts held (2/2) Key highlights Underlying cntracts that are expected t be issued in the future but als cvered by the reinsurance cntract culd be included in the reinsurance cntract bundary if the reinsurer des nt reassess the risks t be transferred frm the underlying cntracts t be issued in the future The special cncessin fr prprtinal cverage reinsurance cntracts in para 62 applies nly as far as initial recgnitin is cncerned Measurement f fulfilment cash flws reflects cnsistency f assumptins with underlying insurance cntracts issued in para 63, but nly t the extent that thse underlying cntracts exist Inclusin f fulfilment cash flws frm expected future underlying reinsured insurance cntracts affects the CSM Unlcking f CSM in the grup f reinsurance cntracts held and the different discunt rate used fr calculating the unlcking adjustments cmpared t the discunt rate utilized t measure the changes in future cash flws will create an asset r a liability in subsequent measurement The TRG members agreed with IASB staff s view but nted significant peratinal cnsequences 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

9 AP04 Insurance acquisitin cash flws paid n an initially written cntract (1/3) Backgrund IFRS 17 Para 27 states that an entity can recgnize an asset r liability fr any insurance acquisitin csts relating t a grup f issued insurance cntracts befre the grup is recgnized Insurance acquisitin cash flws are cash flws arising frm the csts f selling, underwriting and starting a grup f insurance cntracts that are directly attributable t the prtfli f insurance cntracts t which the grup belngs Acquisitin csts can include cmmissins paid uncnditinally fr each initially written cntract and are determined t cmpensate the insurance intermediary fr having secured a plicyhlder wh is expected t renew the cntract in future perids The renewals are new cntracts utside the riginal cntract bundary There is a questin as t whether these cmmissins can be allcated nly t the initial grup r als t the grups where renewed cntracts will be included Key questin: Hw t accunt fr insurance acquisitin cash flws ( CF ) uncnditinally paid when a cntract is first written by the entity, expecting renewals utside the cntract bundary t ccur and has written the new business with this expectatin n renewals? 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) 20 March

10 AP04 Insurance acquisitin cash flws paid n an initially written cntract (2/3) Backgrund cnt d The fllwing views were submitted t TRG: View A The acquisitin cash flws incurred shuld be allcated t the grups f cntracts in existence at that time Future grups t which renewed cntracts will belng are nt cnsidered in the allcatin f these cmmissins If in the same annual perid there are cntracts renewed and cntracts initially written, they are treated as separate grups View B These cmmissins relate t grups f cntracts initially recgnised and thse grups t which renewed cntracts are expected t belng in the future Therefre an asset is recgnised fr part f the cmmissin that wuld be allcated t future grups If in the same annual perid there are cntracts renewed and cntracts initially written, they are treated as separate grups View C Similar t view A, except fr interpretatin f IFRS 17 level f aggregatin requirements: if in the same annual perid there are cntracts renewed and cntracts initially written, they are treated as ne grup. Part f cmmissin incurred n writing initial cntracts is allcated t cntracts renewed in the same annual perid 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) 20 March

11 AP04 Insurance acquisitin cash flws paid n an initially written cntract (3/3) Key highlights Key utcmes f the discussin: Sme TRG members felt that it des nt prtray the ecnmic substance, where the initial cntracts end up being nerus and subsequent renewals mre prfitable. A clarificatin was made that cntracts issued as referred t in IFRS 17 para 27 is used t distinguish them frm cntracts held and this des nt imply that these cntracts have already have been issued by the time the acquisitin cash flws have been incurred. The renewals are new cntracts utside the riginal cntract bundary. Cmmissins cannt be allcated t grups where renewed cntracts will be included. The nn-refundable cmmissins paid fr each individually acquired cntract are directly attributable nly t the grup f newly written cntracts Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

12 AP05 Determining quantity f benefits fr identifying cverage units (1/2) Backgrund Para B119(a) defines the cverage units in the grup as the quantity f cverage prvided by the cntracts in the grup, determined by cnsidering fr each cntract, the quantity f benefits prvided and its expected cverage duratin The paper identifies the fllwing factrs that might be included in determining the quantity f benefits Variability acrss perids in the level f cver prvided by the cntracts in the grup Likelihd f an insured event ccurring t the extent that likelihd affects the expected duratin f a cntract Likelihd f an insured event ccurring t the extent that likelihd affects the amunt expected t be claimed in a perid IASB s view 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

13 AP05 Determining quantity f benefits fr identifying cverage units (2/2) Key highlights The staff argued that the principle in IFRS 17 is that different levels f cver acrss perids shuld be included in the determinatin f the quantity f benefits. Cntracts that ffer larger benefits t a plicyhlder wuld have a larger number f cverage units TRG discussin highlighted a cncern with using maximum level f cver and the need t explain the cncept f pssible valid claim. It was decided t defer all discussin f cverage units till later date t ensure cnsistency in the TRG utcmes given the questins relating t insurance cntracts with investment cmpnents will be discussed at a later meeting Staff encuraged TRG members t submit cmments n the examples in the paper by the end f February 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

14 AP06 Insurance acquisitin cash flws when using fair value transitin (1/1) Key highlights Key questin: Whether insurance acquisitin cash flws that ccurred prir t the transitin date are recgnized as revenue and expenses fr reprting perids subsequent t the transitin date, if fair value apprach t transitin is applied, referring t IFRS 17 para B121(b) and B125? Fair value apprach can be applied if it is impracticable fr an entity t apply IFRS 17 fully retrspectively fr a grup f insurance cntracts IFRS 17 requires an allcatin f acquisitin cash utflws t each grup and this allcatin will reduce the grup s CSM Insurance revenue and insurance service expense recgnized in a perid include equal and ppsite amunts related t insurance acquisitin cash flws. Applicatin f the fair value apprach n transitin reflects nly the expectatin f future and nt past cash flws Insurance acquisitin cash flws that ccurred prir t the transitin date are nt included in the measurement f the CSM 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

15 AP07 Reprting n ther questins submitted (1/2) Backgrund and summary f discussin Nt all f the issues cntained in this staff paper prmpted cmments frm the TRG members The staff will cnsider publishing educatinal materials n these tpics in the future t further supprt implementatin S04-Subsequent treatment f cntracts acquired in their settlement perid S09- Allcating the cntractual service margin at the end f a perid t cverage units S17- Using cnsistent assumptins fr the measurement f reinsurance cntracts held and the underlying insurance cntracts S20- Gruping cntracts using the mdified retrspective apprach t transitin S23- Premiums received applying the premium allcatin apprach S26- Variable fee apprach when the return is shared based n amrtised cst measurement f the underlying items 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) 20 March

16 AP07 Reprting n ther questins submitted (2/2) Backgrund and summary f discussin (cnt ) Questins that d nt meet submissin criteria S03- Presentatin f grups f insurance cntracts in the statement f financial psitin S10- Classificatin f cntracts acquired in a business cmbinatin S24- Discunt rates applied t the cntractual service margin fr cntracts withut direct participatin features S25- Investment cmpnents These papers are being cnsidered thrugh ther than TRG prcess S06- Business cmbinatins n transitin - classificatin date S16- Discunt rate t be used t adjust the cntractual service margin f reinsurance cntracts held 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) 20 March

18 After the Feb TRG meeting TRG members were specifically enquired n the belw three tpics after the TRG meeting n 6 February, in which these tpics were included in the Agenda Paper 07: S03- Presentatin f grups f insurance cntracts in the statement f financial psitin S23- Premiums received applying the premium allcatin apprach S04- Subsequent treatment f cntracts acquired in their settlement perid 2018 Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) 20 March

19 Next steps The next TRG submissin deadline is 21 March 2018 The next TRG meeting will be held n 2 May 2018 in IASB ffice in Lndn. The IFRS 17 cverage unit is a key tpic fr interpretatin and will be brught back fr further discussin in May Delitte LLP. All rights reserved. Hng Kng Insurance Implementatin Supprt Grup (HKIISG) - 20 March

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IFRS 17 TRG: 2 May 2018

IFRS 17 TRG: 2 May 2018 Summary Francesc Nagari, Delitte Glbal IFRS Insurance Leader 10/05/2018 Agenda Summary f the TRG 2 May papers 1. Cmbinatin f Insurance Cntracts 3 2. Risk adjustment in a grup f